Saturday, February 28, 2009

What am I missing?

We keep hearing from the din on CNBC, Fox News, CNN and radio personalities... as well numerous members of congress and of the hoards of people carping about providing assistance to people who "got in over their heads".... so help me understand the following scenario that is occurring in the vast majority of industries and every state and city throughout the country... company names are interchangeable...

Caterpillar recently announced that, due to reduced and canceled orders from China and other countries around the world, and fearing that this could be a long drawn out down turn in income, and to stretch out its cash reserves it was cutting back in expenses... laying off people... cutting outlays, turning off lights, turning down the thermostat suggesting that employees wear sweaters...it internalized and cut costs wherever possible and then renegotiated its multi-million dollar debt with "ABC Bank"... The bank, feeling that Caterpillar has been a good customer, and is current on its loan payments, owes it millions of dollars and has done "all of the right things" agrees to a rate and term modification of the company debt... and in doing so maintains the firms fine credit rating... given the cause, Wall Street "experts" (are there really any?), deemed this a very prudent business decision on the part of the Caterpillar management... the stock sort of holds steady... not a bad feat in this business climate...

"Bob and Betty Jones”, are residents of Moline, IL... Bob has worked at Caterpillar for 20+ years... and has some seniority, in the cut back he gets to keep his job... but his hours get cut by 30%... Betty is the local librarian... due to the economy the city decides to cut expenses and close the library one extra day per week... thus Betty's hours get cut by 20%... "The Jones’s" have stellar credit... great retirement accounts... outside of their mortgage, little debt.... fearing that this could be a long drawn out down turn in income, and in order to stretch out their reserves,cut back in expenses... turn down the thermostat, and wear sweaters, turn off lights around the house... buy chuck instead of prime... use regular grade of gas instead of the recommended mid-grade... instead of dining out each Friday, they cut that to once a month... and then to a less expensive restaurant...cut back on any credit card use... internalize to find and reduce expenses wherever possible... and lastly contact the very same "ABC Bank", their mortgage holder, to negotiate a modification in only the rate and term ...of their $150,000 loan. The bank recognizes that the "Jones’s" have been very good customers... HOWEVER, BECAUSE they are current on their loan, ”ABC Bank" refuses their request; advising them that, before the bank will even entertain any modification, they first must be delinquent by at least 60 days... and in the process, make a mess of their previously superb credit rating…

For "ABC Bank", Caterpillar is simply too big to allow to fail... "Bob and Betty" don't have a large enough mortgage... simply don't owe "ABC Bank" enough, and it's OK if they fail... What I am missing... At this juncture of these economic and real estate catastrophes it is not just the “sub-primer’s” who are in trouble… this cancer has metastasized throughout the entire country… There are far more “Bob and Betty Jones” in need a relief than people who “stretched the envelope”… does anyone really want to contemplate the result of some 25 million mortgage defaults…